The Impact of Investor Sentiment on Equity Returns: Comparison between Financial and Non-Financial Sectors of Pakistan Stock Exchange

Authors

  • Shiza Khan Ulster University, Birmingham, United Kingdom
  • Faiza Saleem Graduate School of Business, Universiti Sains Malaysia
  • Asia Bibi BUITMS

Keywords:

Investor Sentiment, Price Earnings Ratio, Share Turnover, Money Flow Index, Vector Auto Regression Model.

Abstract

Purpose: This study intends to examine and compare the impact of Investor Sentiments (IS) on Equity Returns (ER) in the financial and non-financial sectors of Pakistan.

 

Design and Methodology: This study uses quantitative secondary data spanning from 2008 to 2019, collected from the official website of Pakistan Stock Exchange (PSX) and publication of State Bank of Pakistan (SBP). The quantitative data analysis has been done by using Vector Auto Regression (VAR) model.

 

Findings: This study demonstrates a positive relationship between IS and ER in the financial and non-financial sectors companies listed in PSX.  

 

Implications: As a result of these findings, the investors have a better understanding and knowledge about diverse aspects of IS. This study also facilitates the process of price forecasting performed by fund and financial advisors. Last not the least, this study bears important implications for policymakers by enabling them to reduce variations in ER and to hedge risk through stabilizing IS.

Keywords: Investor Sentiment, Price Earnings Ratio, Share Turnover, Money Flow Index, Vector Auto Regression Model.

References

Aggarwal, D., & Mohanty, P. (2018). Do Indian stock market sentiments impact contemporaneous returns?. South Asian Journal of Business Studies, 7(3), 332-346.

Anderson, K., & Brooks, C. (2006). The long‐term price‐earnings ratio. Journal of Business Finance & Accounting, 33(7‐8), 1063-1086.

Antoniou, C., Doukas, J. A., & Subrahmanyam, A. (2015). Investor sentiment, beta, and the cost of equity capital. Management Science, 62(2), 347-367.

Baker, M., & Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3), 271-299.

Baker, M., & Wurgler, J. (2000). The equity share in new issues and aggregate stock returns. The journal of Finance, 55(5), 2219-2257.

Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, 61(4), 1645-1680.

Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of economic perspectives, 21(2), 129-152.

Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307-343.

Barrot, J.-N., Kaniel, R., & Sraer, D. (2016). Are retail traders compensated for providing liquidity? Journal of Financial Economics, 120(1), 146-168.

Bekaert, G., & Harvey, C. R. (2003). Emerging markets finance. Journal of empirical finance, 10(1-2), 3-55.

Bernard, V. L., & Thomas, J. K. (1990). Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of accounting and economics, 13(4), 305-340.

Braun, P. A., & Mittnik, S. (1993). Misspecifications in vector autoregressions and their effects on impulse responses and variance decompositions. Journal of Econometrics, 59(3), 319-341.

Brown, G. W. (1999). Volatility, sentiment, and noise traders. Financial Analysts Journal, 55(2), 82-90.

Brown, G. W., & Cliff, M. T. (2005). Investor sentiment and asset valuation. The journal of Business, 78(2), 405-440.

Cavanaugh, J. E., & Neath, A. A. (2019). The Akaike information criterion: Background, derivation, properties, application, interpretation, and refinements. Wiley Interdisciplinary Reviews: Computational Statistics, 11(3), e1460.

Chen, H., Chong, T. T.-L., & Duan, X. (2010). A principal-component approach to measuring investor sentiment. Quantitative Finance, 10(4), 339-347.

Chong, T. T.-L., Cao, B., & Wong, W. K. (2017). A principal component approach to measuring investor sentiment in Hong Kong.

Concetto, C. L., & Ravazzolo, F. (2019). Optimism in Financial Markets: Stock Market Returns and Investor Sentiments. Journal of Risk and Financial Management, 12(2), 1-14.

Cornelli, F., Goldreich, D., & Ljungqvist, A. (2006). Investor sentiment and pre‐IPO markets. The journal of Finance, 61(3), 1187-1216.

Corredor, P., Ferrer, E., & Santamaria, R. (2015). The impact of investor sentiment on stock returns in emerging markets: The case of Central European Markets. Eastern European Economics, 53(4), 328-355.

Dai, Z.-M., & Yang, D.-C. (2018). Positive feedback trading and investor sentiment. Emerging Markets Finance and Trade, 54(10), 2400-2408.

Daniel, K., Hirshleifer, D., & Subrahmanyam, A. (1998). Investor psychology and security market under‐and overreactions. The journal of Finance, 53(6), 1839-1885.

De Bondt, W. F., Muradoglu, Y. G., Shefrin, H., & Staikouras, S. K. (2008). Behavioral finance: Quo vadis? Journal of Applied Finance (Formerly Financial Practice and Education), 18(2).

De Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact? The journal of Finance, 40(3), 793-805.

De Santis, G. (1997). Stock returns and volatility in emerging financial markets. Journal of International Money and finance, 16(4), 561-579.

Dennis, P., & Mayhew, S. (2002). Risk-neutral skewness: Evidence from stock options. Journal of financial and quantitative analysis, 37(3), 471-493.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366a), 427-431.

Fama, E. F. (1965). The behavior of stock-market prices. The journal of Business, 38(1), 34-105.

Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3-43.

Finter, P., Niessen-Ruenzi, A., & Ruenzi, S. (2012). The impact of investor sentiment on the German stock market. Zeitschrift für Betriebswirtschaft, 82(2), 133-163.

Fisher, K. L., & Statman, M. (2006). Market timing in regressions and reality. Journal of Financial Research, 29(3), 293-304.

Frost, J. (2019). How to Interpret Regression Models that Have Significant Variables but a Low R-Squared-Statistics by Jim. Statistics by Jim.

Frost, J. (2014). How to interpret regression models that have significant variables but a low R-squared.

Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the econometric society, 424-438.

Greenwood, R., & Nagel, S. (2009). Inexperienced investors and bubbles. Journal of Financial Economics, 93(2), 239-258.

Hair Jr, J. F., Hult, G. T. M., Ringle, C., & Sarstedt, M. (2016). A primer on partial least squares structural equation modeling (PLS-SEM): Sage publications.

Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 1251-1271.

Hervé, F., Zouaoui, M., & Belvaux, B. (2019). Noise traders and smart money: Evidence from online searches. Economic Modelling.

Hirshleifer, D., & Hong Teoh, S. (2003). Herd behaviour and cascading in capital markets: A review and synthesis. European Financial Management, 9(1), 25-66.

Huang, D., Jiang, F., Tu, J., & Zhou, G. (2015). Investor sentiment aligned: A powerful predictor of stock returns. The Review of Financial Studies, 28(3), 791-837.

Hudson, Y., & Green, C. J. (2015). Is investor sentiment contagious? International sentiment and UK equity returns. Journal of Behavioral and Experimental Finance, 5, 46-59.

Kapoor, S., & Prosad, J. M. (2017). Behavioural finance: A review. Procedia computer science, 122, 50-54.

Keynes, J. M. (1937). The general theory of employment. The quarterly journal of economics, 51(2), 209-223.

Khan, M. A., & Ahmad, E. (2019). Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead–Lag Relationship with Returns: Evidence from Pakistan. Sustainability, 11(1), 94.

Kim, M., & Park, J. (2015). Individual investor sentiment and stock returns: Evidence from the Korean stock market. Emerging Markets Finance and Trade, 51(sup5), S1-S20.

Kim, T., & Ha, A. (2010). Investor sentiment and market anomalies. Paper presented at the 23rd Australasian Finance and Banking Conference.

Kim, Y., & Lee, K. Y. (2022). Impact of investor sentiment on stock returns. Asia‐Pacific Journal of Financial Studies, 51(1), 132-162.

Kumar, M. S., & Persaud, A. (2002). Pure contagion and investors’ shifting risk appetite: analytical issues and empirical evidence. International Finance, 5(3), 401-436.

Lamont, O., & Frazzini, A. (2005). Mutual Fund Flows and the Cross-Section of Stock Returns. Yale International Center for Finance Working Paper(05-09).

Lee, C. M., Shleifer, A., & Thaler, R. H. (1991). Investor sentiment and the closed‐end fund puzzle. The journal of Finance, 46(1), 75-109.

Liew, V. K.-S. (2004). Which lag length selection criteria should we employ? Economics bulletin, 3(33), 1-9.

Liu, Q., Lee, W. S., Huang, M., & Wu, Q. (2023). Synergy between stock prices and investor sentiment in social media. Borsa Istanbul Review, 23(1), 76-92.

Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological bulletin, 127(2), 267.

Markowitz, H. (1952). Portfolio selection. The journal of Finance, 7(1), 77-91.

Neal, R., & Wheatley, S. M. (1998). Do measures of investor sentiment predict returns? Journal of financial and quantitative analysis, 33(4), 523-547.

Peress, J., & Schmidt, D. (2017). Noise traders incarnate: Describing a realistic noise trading process.

Qiu, L., & Welch, I. (2006). Investor Sentiment Measures, ssrn. com/abstract= 589641.

Rehman, M. (2013). Investor sentiments and exchange rate volatility. Business Review, 8(1), 123-134.

Roberts, H. (1967). Statistical versus clinical prediction of the stock market", unpublished manuscript. Chicago, University of Chicago, Centre for Research on Security Prices.

Ryu, D., Kim, H., & Yang, H. (2017). Investor sentiment, trading behavior and stock returns. Applied Economics Letters, 24(12), 826-830.

Scheinkman, J. A., & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111(6), 1183-1220.

Schmeling, M. (2009). Investor sentiment and stock returns: Some international evidence. Journal of empirical finance, 16(3), 394-408.

Seyhun, H. (1998). Nejat, Investment Intelligence from Insider Trading: Cambridge, MA: MIT Press.

Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of Finance, 19(3), 425-442.

Shiller, R. J. (2003). From efficient markets theory to behavioral finance. Journal of economic perspectives, 17(1), 83-104.

Shleifer, A., DeLong, J. B., Summers, L., & Waldmann, R. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703-738.

Shleifer, A., & Summers, L. H. (1990). The noise trader approach to finance. Journal of economic perspectives, 4(2), 19-33.

Simon, H. (1955). A behavioural and organizational choice. Quarterly Journal of Economics, 69, 99-118.

Sims, C. A. (1980). Macroeconomics and reality. Econometrica: Journal of the econometric society, 1-48.

Sinha, N. R. (2016). Underreaction to news in the US stock market. Quarterly Journal of Finance, 6(02), 1650005.

Statman, M. (2014). Behavioral finance: Finance with normal people. Borsa Istanbul Review, 14(2), 65-73.

Statman, M., Thorley, S., & Vorkink, K. (2006). Investor overconfidence and trading volume. The Review of Financial Studies, 19(4), 1531-1565.

Thaler, R. H. (2005). Advances in behavioral finance (Vol. 2): Princeton University Press.

Ton, Q.-T. (2019). Investor Sentiment and Attention in Capital Markets-A (Social) Media Perspective. Technische Universität.

Tuyon, J., Ahmad, Z., & Matahir, H. (2016). The Roles of Investor Sentiment in Malaysian Stock Market. Asian Academy of Management Journal of Accounting & Finance, 12.

Tversky, A., & Kahneman, D. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.

Ukaegbu, B., & Oino, I. (2014). The determinants of capital structure: A comparison of financial and nonfinancial firms in a regulated developing country–Nigeria. African Journal of Economic and Management Studies, 5(3), 341-368.

Wan, D., Cheng, K., & Yang, X. (2014). The reverse volatility asymmetry in Chinese financial market. Applied financial economics, 24(24), 1555-1575.

Wang, W., Su, C., & Duxbury, D. (2022). The conditional impact of investor sentiment in global stock markets: A two-channel examination. Journal of Banking & Finance, 138, 106458.

Wang, W., Su, C., & Duxbury, D. (2021). Investor sentiment and stock returns: Global evidence. Journal of Empirical Finance, 63, 365-391.

Whaley, R. E. (2000). The investor fear gauge. The Journal of Portfolio Management, 26(3), 12-17.

Zia Ur Rehman, M., ul Abidin, Z., Rizwan, F., Abbas, Z., & Baig, S. A. (2017). How investor sentiments spillover from developed countries to developing countries? Cogent Economics & Finance, 5(1), 1309096.

Zweig, M. E. (1973). An investor expectations stock price predictive model using closed-end fund premiums. The journal of Finance, 28(1), 67-78.

Downloads

Published

2023-12-29

How to Cite

Khan, S., Saleem, F., & Bibi, A. (2023). The Impact of Investor Sentiment on Equity Returns: Comparison between Financial and Non-Financial Sectors of Pakistan Stock Exchange. UW Journal of Management Sciences, 7(2), 18–37. Retrieved from https://uwjms.org.pk/index.php/uwjms/article/view/147